Professional Documents
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MICROECONOMICS
FOURTH CANADIAN EDITION
N. G R E G O R Y M A N K I W
R O N A L D D. K N E E B O N E
K E N N E T H J. M c K ENZIE
NICHOLAS ROWE
PowerPoint® Slides
by Ron Cronovich
Canadian adaptation by Marc Prud’Homme
© 2008 Nelson Education Ltd.
In this chapter, look for the answers to these
questions:
What is consumer surplus? How is it related to the
demand curve?
What is producer surplus? How is it related to the supply
curve?
Do markets produce a desirable allocation of resources?
Or could the market outcome be improved upon?
Chad 175
Flea 300
John 125
Derive the
demand P (price
who buys Qd
of iPod)
schedule:
$301 & up nobody 0
CS = WTP – P
If P rises to $40, P
1. Fall in CS
CS = ½ x 10 x $20 60
due to buyers
= $100. leaving market
50
Two reasons for the
fall in CS. 40
30
2. Fall in CS due to 20
remaining buyers 10
D
paying higher P 0 Q
0 5 10 15 20 25 30
© 2008 Nelson Education Ltd. 16
A C T I V E L E A R N I N G 1:
demand curve
Consumer surplus 50
P
A. Find marginal $ 45
buyer’s WTP at 40
Q = 10.
35
B. Find CS for
30
P = $30.
25
Suppose P falls to $20. 20
How much will CS
15
increase due to…
10
C. buyers entering
5
the market
0
D. existing buyers paying
0 5 10 15 20 Q
25
lower price
17
A C T I V E L E A R N I N G 1:
demand curve
Answers P
50
$ 45
A. At Q = 10, marginal
buyer’s WTP is $30. 40
B. CS = ½ x 10 x $10 35
= $50 30
25
P falls to $20.
20
C. CS for the
15
additional buyers
= ½ x 10 x $10 = $50 10
5
D. Increase in CS
on initial 10 units 0
= 10 x $10 = $100 0 5 10 15 20 Q
25
18
Cost and the Supply Curve
Cost is the value of everything a seller must give up to
produce a good (i.e., opportunity cost).
Includes cost of all resources used to produce good,
including value of the seller’s time.
Example: Costs of 3 sellers in the lawn-cutting business.
P Qs
Derive the supply schedule
from the cost data: $0 – 9 0
10 – 19 1
name cost 20 – 34 2
Angelo $10 35 & up 3
Hunter 20
Kitty 35
$0 – 9 0
$30
10 – 19 1
$20
20 – 34 2
$10 35 & up 3
$0 Q
0 1 2 3
© 2008 Nelson Education Ltd. 21
Cost and the Supply Curve
P
$40 At each Q, the height
Kitty’s of the S curve
$30 is the cost of the
cost
marginal seller,
Hunter’s the seller who would
$20 cost leave the market if the
price were any lower.
$10 Angelo’s cost
$0 Q
0 1 2 3
© 2008 Nelson Education Ltd. 22
Producer Surplus
P
$40 PS = P – cost
$10
$0 Q
0 1 2 3
© 2008 Nelson Education Ltd. 23
Producer Surplus and the S Curve
P PS = P – cost
Suppose P = $40. 50 S
At Q = 15(thousand), 40
the marginal seller’s 30
cost is $30, 1000s of pairs
20 of shoes
and her producer
surplus is $10. 10
0 Q
0 5 10 15 20 25 30
© 2008 Nelson Education Ltd. 25
PS with Lots of Sellers & a Smooth S Curve
PS is the area b/w The supply of shoes
P
P and the S curve,
from 0 to Q. 60
The height of this 50 S
triangle is
40
$40 – 15 = $25.
30
So, h
PS = ½ x b x h 20
= ½ x 25 x $25
10
= $312.5
0 Q
0 5 10 15 20 25 30
© 2008 Nelson Education Ltd. 26
How a Lower Price Reduces PS
If P falls to $30, P
1. Fall in PS
PS = ½ x 15 x $15 60 due to sellers
= $112.5 leaving market S
50
Two reasons for the
fall in PS. 40
30
2. Fall in PS due to 20
remaining sellers 10
getting lower P
0 Q
0 5 10 15 20 25 30
© 2008 Nelson Education Ltd. 27
A C T I V E L E A R N I N G 2:
supply curve
Producer Surplus P
50
A. Find marginal 45
seller’s cost 40
at Q = 10.
35
B. Find PS for
30
P = $20.
25
Suppose P rises to $30. 20
Find the increase
15
in PS due to…
10
C. selling 5
5
additional units
0
D. getting a higher price
0 5 10 15 20 Q
25
on the initial 10 units
28
What Do CS, PS, and Total Surplus Measure?
Total surplus = CS + PS
TS measures the total gains from trade in a market.
P
Market eq’m:
P = $30 60
Q = 15,000 50 S
Total surplus
40 CS
= CS + PS
30
Is the market eq’m PS
efficient? 20
10
D
0 Q
0 5 10 15 20 25 30
© 2008 Nelson Education Ltd. 34
Which Buyers Get to Consume the Good?
Every buyer P
whose WTP is 60
≥ $30 will buy. S
50
Every buyer
40
whose WTP is
< $30 will not. 30
So, the buyers who 20
value the good most
10
highly are the ones D
who consume it. 0 Q
0 5 10 15 20 25 30
© 2008 Nelson Education Ltd. 35
Which Sellers Produce the Good?